"Off" Putting

I’ve never been very keen on going to the dentist.  As important as I believe dental hygiene to be, I’ve come to associate my visits with the dentist with bad things: some level of discomfort, perhaps even pain, a flossing lecture from the hygienist, at the very least.  Most of which is readily avoided by doing the things I know I should be doing regularly – brushing, flossing, a better diet.  And knowing that I haven’t done what I should have been doing, I have good reason to believe that my visit to the dentist will be a negative experience – and so I put it off.

However, it’s not as though the postponement makes the situation any better; if anything, the delay makes the eventual “confrontation” with reality worse. 

That’s what retirement planning is like for many: They know they should be saving, know that they should be saving more, but they hesitate to go through the process of a retirement needs calculation because they are leery of the “pain” of going through the exercise itself, or perhaps even afraid that their checkup will confirm their lack of attentiveness to their fiscal health.  And, like the postponed dental visit, putting it off not only does nothing to rectify the situation, the passage of time (without action) may even allow the situation to worsen.

Indeed, the Retirement Confidence Survey (RCS)[i] has previously found that workers who have done a retirement needs calculation tend to be considerably more confident about their ability to save the amount needed for a financially comfortable retirement than those who have not done so, despite the fact that those doing a calculation tend to cite higher retirement savings goals.  In the 2013 RCS, 31 percent who have done a calculation, compared with 14 percent who have not, say they are very confident that they will be able to accumulate the amount they need, while 12 percent who have not done a calculation, compared with 3 percent who have, report they are not at all confident in their ability to save the amount needed for a financially comfortable retirement.

Next week we’ll commemorate America Saves Week[ii], an annual opportunity for organizations to promote good savings behavior[iii] and a chance for individuals to assess their own saving status.  Not because saving is something you should do once a year, or that reconsidering your financial goals and progress is well-suited to a particular week on the calendar, but because it IS something that should be done regularly in order to be effective.

Over time, I have found that when I make (and keep) regular dentist appointments, those visits are much less painful, and considerably less stressful than the times when I have gone “too long” between appointments.

Similarly, regular savings checkups – like those inspired by events like America Saves Week – can be a lot less “painful” than you might think.

Nevin E. Adams, JD

You can assess your savings plan here.

For a list of six reasons why you—or those you care about—should save, and specifically save for retirement now, see “Sooner or Later“:

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[i] Information from the 2013 Retirement Confidence Survey (RCS) is available online here. Organizations interested in underwriting the 2014 RCS can contact Nevin Adams at nadams@ebri.org.  

[ii] America Saves Week is an annual event where hundreds of national and local organizations promote good savings behavior and individuals are encouraged to assess their own saving status. Coordinated by America Saves and the American Savings Education Council, America Saves Week is February 24–March 1, 2014, a nationwide effort to help people save more successfully and take financial action. More information is available at www.americasavesweek.org.

[iii] Organizations interested in building/reinforcing a workplace savings campaign can find free resources at www.asec.org  including videos, savings tips, and the Ballpark E$stimate® retirement savings calculator, courtesy of the American Savings Education Council (ASEC).

Model "Hones"

After a winter filled with predictions of winter weather that never quite measured up to the forecasts, the nation’s capital (and the Southeast) finally got a taste of what those in the Midwest and Northeast have been contending with for weeks.  Not that there haven’t been close calls here, but up until this week, the multitude of factors that have to come together to produce a significant snowfall here—hadn’t.  Much to the discomfiture of those who ply their trade making such predictions, it should be noted.

While Mother Nature can be notoriously fickle, technologies like Doppler radar are able to discern with greater precision real-time activity which can be fed into sophisticated computer models that draw on the experience of the past to extrapolate a series of potential outcomes—some deemed more likely than others.  Projected outcomes that, despite the recent experience here, do an increasingly accurate job of helping each of us plan our daily commute or that vacation a couple of weeks hence.

Arguably, predictions about retirement readiness are even more complicated than weather forecasting, though there are certain similarities.  Done properly, they require a foundation in knowing the actual resources available to individuals—and an ability, through the use of sophisticated computer models, to forecast the impact of current behaviors on future outcomes.  Those models must also consider the likelihood and timing of certain external factors, and their impact on resources, and to project if (or when) those resources will run short against lifespans and circumstances as unique and variable as the American population.

Of course, those computer models require updating on a regular basis to properly account for changes in assumptions (and realities).  A recent EBRI Issue Brief[1] noted that, due to the increase in financial market and housing values during 2013, the probability that Baby Boomers and Generation Xers would NOT run short of money in retirement increased between 0.5 and 1.6 percentage points (when aggregated by age cohort), based on the Employee Benefit Research Institute (EBRI) Retirement Readiness Ratings (RRRs).[2]

EBRI’s analysis, which analyzes the major factors that cause retirement outcomes to differ, and their impact, found that, among other things, eligibility for participation in an employer-sponsored 401(k)-type plan remains one of the most important factors for retirement income adequacy.  In fact, Gen Xers in the lowest-income quartile with 20 or more years of future eligibility in a defined contribution plan are half as likely to run short of money as those with no years of future eligibility.

Not surprisingly, the report also noted that the risks of a long life and high long term-care costs drive huge variations in retirement income adequacy—and suggested that annuities and long-term care insurance could mitigate much of the variability in retirement income adequacy at or near retirement age.

Of course, while a broad-based forecast is sufficient for the local weather, and a broad-based sense of the nation’s retirement readiness is powerful fodder for purposes of setting public policy goals, individual forecasts—in order to be accurate—require more customized inputs.[3]  

Nevin E. Adams, JD

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[1] “What Causes EBRI Retirement Readiness Ratings™ to Vary: Results from the 2014 Retirement Security Projection Model®” is available online here.

[2] EBRI’s proprietary Retirement Security Projection Model^® (RSPM), unlike many other models, takes into account a combination of deterministic expenses from the Consumer Expenditure Survey (as a function of age and income) as well as health insurance and out-of-pocket, health-related expenses, plus stochastic expenses from nursing home and home-health care (at least until the point such expenses are covered by Medicaid).  A chronology of the EBRI Retirement Security Projection Model^® is available online here.  

[3] Fortunately, individuals who want a sense of their retirement readiness can check out EBRI’s BallparkE$timate,^® along with the other materials available at www.choosetosave.org

"Common' Sense

At a time when the nation’s legislative wheels seem mired in partisanship, the last week of January turned out to be a busy one for retirement plan proposals.

First the president unveiled his myRA concept in the State of the Union (along with a reference to an automatic IRA proposal previously included in the White House’s annual budget), followed a day later by introduction of the Retirement Security Act of 2014, a bipartisan proposal by Sens. Bill Nelson (D-FL) and Susan Collins (R-ME). A day after that, Sen. Tom Harkin (D-IA), chairman of the Senate Health, Education, Labor, and Pensions (HELP) Committee, formally introduced the Universal, Secure, and Adaptable (USA) Retirement Funds Act of 2014, an updated version of his 2012 proposal.

All three were intended to expand and improve the retirement savings of Americans—although, as you might expect, the three take quite different approaches. Consider that the myRA calls for the development of a “new retirement savings security” to encourage savings in a kind of Roth IRA, while Sen. Harkin’s proposal would require employers above a certain size to offer a whole new type of retirement savings plan (and would impose some new threshold enrollment and withdrawal requirements on existing 401(k)s, as well). As for the Nelson/Collins proposal, it seems to be largely focused on lowering or removing certain current regulatory and administrative barriers to smaller employers offering retirement plans.

Despite their varied approaches to the commonly-stated goal of expanding retirement savings, all three do have one other key commonality: All look to leverage the success of the work place and systematic payroll deductions in fostering retirement savings. Of course, that’s a foundation whose worth previous EBRI research has documented:¹ the impact that eligibility for a work place retirement plan can have on retirement readiness,² as well as the additional help that automatic-enrollment designs can provide.

It remains to be seen whether the legislative proposals will go anywhere—and the potential impact of myRA on motivating new savers is also uncertain. Just this week, Senate Majority Leader Harry Reid (D-NV) introduced a proposal on defined benefit pension smoothing—not to provide any kind of help for retirement, but as a way to pay for a three-month extension of unemployment benefits.

But as America Saves Week nears, the activity on Capitol Hill serves as an additional reminder that a good place to start—any time, with or without the incentives of legislative change—is to Choose to Save. ®³

Nevin E. Adams, JD

¹ The January EBRI Notes, “The Role of Social Security, Defined Benefits, and Private Retirement Accounts in the Face of the Retirement Crisis,” is available online here.

² See “The Impact of Automatic Enrollment in 401(k) Plans on Future Retirement Accumulations: A Simulation Study Based on Plan Design Modifications of Large Plan Sponsors,” online here, and “Increasing Default Deferral Rates in Automatic Enrollment 401(k) Plans: The Impact on Retirement Savings Success in Plans With Automatic Escalation,” online here.

³ You can find a wide variety of tools and resources—including the popular and widely recommended Ballpark E$timate—at http://www.choosetosave.org/

Motion "Sensers"

I’m not sure exactly when I was introduced to the concepts behind Sir Isaac Newton’s laws of motion.  While behavioral finance has laid claim to the concept of (and means of combatting) inertia in benefit plan design, Newton’s first law of motion (sometimes called “the law of inertia”)—first published in the late 1600s—reminds us that (in layman’s terms), an object at rest remains at rest; or perhaps more precisely, an object continues to do whatever it happens to be doing unless a force is exerted upon it.

However, the one I remember most from earlier days is the third law of motion—the notion that for every action there is an equal and opposite reaction.  To this day, I have a “Newton’s cradle” at my desk.

While Newton’s laws were intended to explain the motion of objects, they do seem to have application in matters of human interaction as well.  One need only look at the increasingly strident levels of partisanship on Capitol Hill to appreciate the stridency of “equal and opposite” reactions.

A recent EBRI publication[1] noted that recent decisions by some employers to eliminate health benefits for spouses who were eligible for coverage through their own employer could represent a “tipping point” in employment-based health benefits.  While the report noted that in 2012, 7 percent of employers did not cover spouses when other coverage was available to them, it also cautioned that as of late 2012–early 2013, another 8 percent of large employers were reporting that they planned to exclude spouses from coverage when other coverage was available.

These decisions come at a time when employers are wrestling with how to control the rising cost of providing health benefits to workers, in part due to the requirements of the Patient Protection and Affordable Care Act of 2010 (PPACA).[2]  In fact, one large employer that recently made the decision to drop spousal coverage under those circumstances specifically said, “since the Affordable Care Act requires employers to provide affordable coverage, we believe your spouse should be covered by their own employer.”

EBRI’s analysis indicates that the costs of covering spouses may well represent a tempting cost reduction target for some.  The report notes that, in 2011, policyholders spent an average of $5,430 on health care services, compared with $6,609 for spouses, and—even adjusting for factors such as gender, age, and overall health status—found that spouses still have health care costs that are roughly 7 percent higher than policyholders.

The report cautions, however, that while “first-mover” firms may save money in the short run by eliminating working spouses from their plan, those costs could come back to them over time as other employers embrace that approach—basically returning policyholders to their coverage who heretofore were covered as spouses in other programs.

Ultimately, any savings from those moves will depend upon each firm’s composition of couples and their respective employment statuses.  Indeed, given prevailing levels of cost sharing, the report notes that employers might end up worse off under a change in spousal coverage policies, particularly since employers generally subsidize employee-only coverage more than they subsidize family coverage.

As the EBRI report reminds us, decisions about benefit plan design, like so many other decisions, should be made thoughtfully—and with an eye toward the realization that, for every action there can be an equal, opposite, and sometimes greater, reaction.

Nevin E. Adams, JD

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[1] “The Cost of Spousal Health Coverage” is available online here.

[2] PPACA requires that employers with 50 or more workers provide health coverage to workers and dependent children until they reach age 26. It does not, however, require employers to provide health coverage to spouses, whether or not they are eligible for other health insurance.

Safety "Net"

I’m one of those travelers who absolutely dreads cutting it to the last minute. Not that I haven’t been forced to do so, from time to time, but I’m generally the one chomping at the bit to get to the airport, or to hit the highway an hour before anyone else. In my defense, on more than one occasion that “cushion” has been the difference between catching a flight or not. Planning that only considers a “best” or “normal” scenario too often overlooks the unexpected—and sometimes that margin of error is all you have.

For over a decade EBRI has modeled the nation’s potential retirement savings shortfall, and the EBRI Retirement Readiness Ratings™ provide an assessment of how many Americans are at risk of running short of money for needed expenses in retirement. In contemplating expenses, that model considers the regular expenses of living in retirement, as well as uninsured medical expenses, and the potential costs of nursing home care.

However, we have also documented and quantified the role of Social Security, defined benefit and private retirement accounts on retirement income adequacy for Baby Boomers and Gen Xers with an eye toward replacing their preretirement wages and income. While this more traditional focus on income replacement may misstate an individual’s actual post-retirement financial situation, many financial planners work with this goal as a starting point, and it can provide valuable insights particularly when—as is the case with EBRI’s projections—it is able to leverage actual 401(k) data from the unique EBRI/ICI 401(k) database, the largest such repository in the world.

Indeed, based on a recent EBRI analysis, between 83 and 86 percent of workers with more than 30 years of eligibility in a voluntary enrollment 401(k) plan are simulated to have sufficient 401(k) accumulations that, combined with current levels of Social Security retirement benefits, will be able to replace at least 60 percent of their age-64 wages and salary on an inflation-adjusted basis.

When the threshold for a financially successful retirement is increased to 70 percent replacement of age-64 income, 73–76 percent of these workers will still meet that threshold, relying only on 401(k) and Social Security combined. At an 80 percent replacement rate, 67 percent of the lowest-income quartile will still meet the threshold; however the percentage of those in the highest-income quartile deemed to be “successful” relying on just these two retirement components slips to 59 percent, reflecting the progressive nature of Social Security.

As positive a result as that seems for many, when the same analysis is conducted for automatic enrollment 401(k) plans (with an annual 1 percent automatic escalation provision and empirically derived opt-outs), the probability of success increases substantially: 88–94 percent at a 60 percent threshold; 81–90 percent at a 70 percent replacement threshold; and 73–85 percent at an 80 percent threshold.

That’s not quite the doomsday crisis scenario portrayed by many of the headlines in vogue today, though EBRI’s projections still show that a large number of Americans—even among those eligible for a 401(k) plan for 30 years—won’t be able to replace that pre-65 salary even at the various levels modeled, based on current savings patterns.

It does, however, illustrate the impact that changes in those current savings behaviors can have—and it underscores the significant role of Social Security as a vital safety net for the nation’s retirement security.

Nevin E. Adams, JD

“The Role of Social Security, Defined Benefits, and Private Retirement Accounts in the Face of the Retirement Crisis” is available online here.

Stocks Swayed by the Super Bowl?

Will your portfolio soar with the Seahawks, or get kicked by the Broncos? 

That’s what adherents of the so-called Super Bowl Theory—which maintains that when a team from the old National Football League wins the Super Bowl, the S&P 500 will rise, whereas should a team from the old American Football League prevail, stock prices would be expected to fall—would likely predict.

Sure enough, last year’s victory by the Baltimore Ravens (who, it might be recalled, are really a legacy NFL team via their Cleveland Brown roots) coincided with a 29.6 percent gain for the S&P 500.  Moreover, the indicator has been correct 37 of the last 47 years, or nearly 79 percent of the time.

Not only has the Super Bowl Indicator consistently predicted the direction of the market, but returns when the old NFL wins and when the AFL wins are dramatically different, according to a recent report in the Wall Street Journal, which notes that the Dow has averaged a healthy 11.6 percent return in years in which the old NFL wins the Super Bowl and has declined by an average of 0.74 percent in years in which the old AFL prevailed.

Fare Way?

That the markets fared well in 2013 was hardly a true test of the Super Bowl Theory since, as it turned out, both teams in Super Bowl XLVII—the Baltimore Ravens (by way of NFL legacy Cleveland Browns) and the San Francisco 49ers—were NFL legacy, and thus an NFL legacy team would win regardless of the end result.

Of course, looking back over the years, the record is a bit, shall we say, “inconsistent.”  Consider that in 2012 a team from the old NFL (the NY Giants) took on—and took down—one from the old AFL (the New England Patriots, who once were the AFL’s Boston Patriots).  And, in fact, 2012 was a pretty good year for stocks. 

The year before that, the Pittsburgh Steelers (representing the American Football Conference) took on the National Football Conference’s Green Bay Packers—two teams that had some of the oldest, deepest and, yes, most “storied” NFL roots, with the Steelers formed in 1933 (as the Pittsburgh Pirates) and the Packers, founded in 1919. So, according to the Super Bowl Theory, 2011 should have been a good year for stocks (because, regardless of who won, an NFL team would prevail). But as you may recall, while the Dow gained ground for the year, the S&P 500 was, well, flat.

On the other hand, 2010 turned out pretty well for the markets—a year when the New Orleans Saints bested the Indianapolis Colts, though it was, after all, another Super Bowl featuring two teams with NFL roots (the Colts by way of the storied Baltimore Colts franchise).  That was also the case in 2009 when both the Arizona Cardinals and the Pittsburgh Steelers shared NFL roots (the Arizona Cardinals by way of once upon a time being the St. Louis Cardinals), AND in 2007, when the S&P 500 rose 3.53 percent as the Indianapolis Colts beat the NFL legacy Chicago Bears 29-17, as well as in 2006 when the Pittsburgh Steelers defeated these same Seattle Seahawks; that turned out to be a good year for equities, with the S&P 500 closing up more than 13 percent.

Patriot Gains

Times were better for Patriots fans in 2005 when they bested the NFC’s Philadelphia Eagles 24-21. According to the Super Bowl Theory, the markets should have been down for the year. However, in 2005 the S&P 500 climbed 2.55 percent.   

Of course, the 2002 win by those same New England Patriots accurately foretold the continuation of the bear market into a third year (at the time, the first accurate result in five years). But the Patriots’ 2004 Super Bowl win against the Carolina Panthers failed to anticipate a fall rally that helped push the S&P 500 to a near 9 percent gain that year, sacking the indicator for another loss.

Consider also that, despite victories by these same (AFL legacy) Denver Broncos in 1998 and 1999, the S&P 500 continued its winning ways, while victories by the NFL legacy St. Louis (by way of Los Angeles) Rams and the Baltimore Ravens, did nothing to dispel the bear markets of 2000 and 2001, respectively.

In fact, the Super Bowl Theory “worked” 28 times between 1967 and 1997, then went 0-4 between 1998 and 2001, only to get back on track from 2002 on (purists still dispute how to interpret Tampa Bay’s victory in 2003, since the Buccaneers spent their first NFL season in the AFC before moving to the NFC).

Indeed, the Buccaneers’ move to the NFC was part of a swap with the Seattle Seahawks, who did, in fact, enter the NFL as an NFC team in 1976 but shuttled quickly over to the AFC (where they remained through 2001) before returning to the NFC(1). 

And, not having entered the league until 1976, wherever they began, can the Seahawks truly be considered a “legacy” NFL squad?

Investor adherents to this market theory are presumed to be pulling for the NFC’s Seahawks over the old AFL (and new AFC Champion) Denver Broncos in Super Bowl XLVIII.  On the other hand, when Denver won its back-to-back Super Bowls in 1998 and 1999 (2), the Dow and S&P did pretty well; and in 2006—when the Seahawks made their only other Super Bowl appearance and lost—the S&P 500 gained nearly 16 percent. 

Regardless, it looks like it could be a good game—and whether you are a proponent of the Super Bowl Theory or not, would be one in which whoever wins, we all will!

-          Nevin E. Adams, JD

(1) In fact, Seattle is the only team to have played in both the AFC and NFC Championship Games, having relocated from the AFC to the NFC during league realignment prior to the 2002 season. The Seahawks are the only NFL team to switch conferences twice in the post-merger era. The franchise began play in 1976 in the NFC West division but switched conferences with the Buccaneers after one season and joined the AFC West.

(2) Ignoring, of course, the Super Bowls Denver lost (and the markets “won”) in 1978, 1987, and 1988 and 1989 – the latter still the widest margin of loss (55-10) in Super Bowl history)

"Left" Overs

On more than a few occasions in my youth, I would misplace some object of importance. Generally it was just something I set aside for just a moment in pursuit of some more interesting endeavor—and sometimes it was something I set down and forgot about until much later.

Regardless, being unsuccessful in locating the object, I was frequently inclined to suspect that the culprit responsible for the disappearance was my mother, who—as mothers do, spent more than a little of her existence picking up objects that had been left unattended in unsuitable places. There were, however, times when she had played no role in the “disappearance,” and she’d admonish me to look more diligently—that “it didn’t just get up and walk away on its own…”

Now, while there were times when I was certain that the object in question had done just that, once I was able to retrace my steps, to recall where I had been and when—and, inevitably, there it was.
That said, I wasn’t always happy to find things where I left them; comic books don’t hold up well in the rain, for instance, and fragile objects left in the reach of younger siblings (or pets) can have a frustratingly short shelf life.

Retirement plan sponsors, and those who support their efforts, have worked long and hard to engage participants with the management and oversight of their retirement plan balances, with mixed results. However, even the most engaged participants seem to struggle to find the time, inclination, or discipline to revisit those initial investment choices, much less to do so at the appropriate times. In fact, left to their own devices, it’s likely that many—perhaps most—retirement plan participants looking to see how their balances are invested would find them right where they “left” them at that initial enrollment meeting (though with proportions shifted by the markets in the interim).

Enter the target-date fund (TDF), a type of investment fund apportioned according to what investment professionals deem to be an appropriate age-based blend of stocks, bonds, and other asset classes for an individual within a particular target date of his or her retirement.

Though their mark was being made prior to the sanction of the design as a qualified default investment alternative (QDIA) in the Pension Protection Act of 2006, target-date fund availability and usage have soared along with the ensuing expanded adoption of automatic enrollment. Indeed, nearly three-quarters (72 percent) of 401(k) plans in the EBRI/ICI 401(k) database included target-date funds in their investment lineup at year-end 2012, and 41 percent of the roughly 24 million 401(k) participants in that database held target-date funds. Among participants who were offered target-date funds as a plan option, 60 percent held them at year-end 2012, and target-date fund assets represented 22 percent of the assets of plans offering such funds in their investment lineups.

Reflecting the growing popularity of automatic enrollment, at year-end 2012, nearly 54 percent of the account balances of recently hired participants in their 20s were in balanced funds (a significant subset of which is in target-date funds), compared with 7 percent in 1998. Moreover, at year-end 2012, 43 percent of the account balances of recently hired participants in their 20s were invested in target-date funds, compared with 40 percent at year-end 2011.

The impact of these shifts, chronicled in the extensive EBRI/ICI 401(k) database, is already manifested in the increasingly diversified portfolios of newer hires and younger participants. Beyond that initial allocation decision, the TDF design incorporates an ongoing rebalancing over time, one that shifts the underlying portfolios such that they are less focused on growth and more focused on income over time—a rebalancing that occurs automatically, and without requiring the input or involvement of the participant-investor.

That is likely to have a significant impact over time, because with retirement investments, as with life, we often plan to come back and revisit our choices more often than time (or life) allows.

Nevin E. Adams, JD

“401(k) Plan Asset Allocation, Account Balances, and Loan Activity in 2012” is available online here.
In 2011, an EBRI Issue Brief provided an informative examination of the use of target-date funds (TDFs) by a consistent group of 401(k) participants in plans that offered them in 2007 through 2009. See “Target-Date Fund Use in 401(k) Plans and the Persistence of Their Use, 2007–2009,” online here.

Penny Whys?

We tried to introduce our kids to money and financial concepts relatively early. We encouraged them to save some of their monetary gifts, let them put the money in the offering plates at church, and provided them with a modest allowance for chores commensurate with their age and abilities. For all that, they never really seemed to fully appreciate the “value of money” until they started earning a paycheck outside the home (I knew they were “getting” it, when they wanted to know who FICA was!).

Perhaps because of their early education, there weren’t massive behavioral changes. I was pleased to see their spending on gifts for family members rise with their income and, after an initial spending “spurt” (likely attributable to a sense of newfound wealth), they seemed to settle in. But what happened next was that, while they would spend money on others, they tended to hold back. In fact, what seemed to emerge was not so much a pattern of setting money aside, but a reluctance to spend; not so much saving, as hoarding. Indeed, it was interesting to see how they reacted to spending now that it was their own money.

One of the premises underlying the introduction of consumer-driven health plans is that they do a better job of “engaging” the participant/consumer in the cost(s) of their health care decisions, either in providing a finite amount of financial resources from the employer for that purpose, designing the plan so that the worker has a more direct financial involvement in the decision, or both. In fact, the 2013 EBRI/Greenwald & Associates Consumer Engagement in Health Care Survey (CEHCS) found evidence that adults in a consumer-directed health plan (CDHP) and those in a high-deductible health plan (HDHP) were more likely than those in a traditional plan to exhibit a number of cost-conscious behaviors.

However, one of the policy concerns with those designs is that individuals would make medical decisions based on expense, rather than medical necessity. Indeed, recent research by the EBRI Center for Research on Health Benefits Innovation (CRHBI) notes that medication adherence—which has been shown to produce substantial savings as a result of reductions in hospitalizations and emergency room use—is known to be affected by out-of-pocket cost to patients.

That EBRI CRHBI study, published in a recent issue of The American Journal of Managed Care,
examined the impact of adopting a health savings account (HSA) consumer-directed health plan (CDHP) on medication adherence for individuals with five chronic conditions disease. Based on the experience of a large manufacturer that replaced all of its existing health insurance options with a CDHP-HSA, the research found that in the first year under the new plan, the number of prescriptions filled, the proportion of days covered, and the proportion of patients who were adherent declined for all conditions except asthma/COPD. While the effects diminished some in the second year for those with diabetes, the levels persisted among those with hypertension, dyslipidemia, and depression.

These findings have important policy implications, in that—notwithstanding the presence of HSAs and employer contributions—medication utilization and adherence declined when high deductibles were imposed.

As the article explains, if these reduced levels of medication adherence for chronic conditions are sustained, it is likely that they will increase medical costs and adversely impact worker productivity. Certain regulatory changes might permit some mitigation of the impact, by supporting CDHP design changes that would provide first-dollar coverage for chronic disease medications for participants using HRAs. Moreover, it suggests that employers may need to provide education and ongoing support to encourage appropriate use of account funds so that prescription drug use for chronic conditions remains a priority for their workers.

There’s an old saying that cautions against being “penny wise and pound foolish”—the tendency to conserve relatively small amounts, only to be wasteful when it comes to larger expenditures. It is, after all, one thing to set money aside for a rainy day, and another altogether to trigger a rainy day by not spending enough on the right ones.

Nevin E. Adams, JD

[1] “Findings from the 2013 EBRI/Greenwald & Associates Consumer Engagement in Health Care Survey” is available online here.

[2]  “Medication Utilization and Adherence in a Health Savings Account–Eligible Plan” is available online here.

"Whether" Forecasts

This is the time of year where, in many parts of the county, the weather—and weather forecasters—dominate the nightly news coverage, certainly when the predictions are dire.  Indeed, having had the opportunity to live in several different parts of the country, I can assure you that the bigger the projected snowfall, the more hyped the coverage.

Several weeks back, the local meteorologists were all agog about an impending snowfall in the Washington, DC area—a snowfall  initially projected at 2–4 inches of accumulation, but that was quickly revised to 3–5 inches, and then to 4–7 inches.  The local mass transportation systems sprang into action, announcing alternative schedules, state officials advised those who didn’t need to be on the roads to stay home, non-emergency federal employees in the area were granted an excused absence, while others were directed to telecommute.

As it turned out, it did snow—but not much, and certainly not in the amounts that had garnered all the attention.  Afterwards, meteorologists were quick to point out that accumulations had matched projections in some areas, although those areas were relatively small and generally far removed from major metropolitan centers.  Ultimately, more were affected by the weather forecast than the weather itself.

Dire predictions are also common about the retirement prospects for Americans.  A recent headline proclaims “Americans Are $6.8 Trillion Short On Retirement Savings,” a figure that the article proceeds to tell us amounts to $113,000 per household “for those on the eve of retirement” —that is, those ages 55 to 64.

Actually, that $6.8 trillion is the low end of a range published by the National Institute on Retirement Security (NIRS) about six months ago,[1] and is close to the $6.6 trillion estimate of the Center for Retirement Research (CRR), which we have commented on previously (see “Rely-Able?”)  The NIRS projections were largely derived by looking at self-reported retirement account balances, financial assets and net worth from the Federal Reserve’s 2010 Survey of Consumer Finances, incorporating some assumptions about defined benefit assets, and extrapolating target retirement savings needs based on a set of age-based income multipliers—income multipliers, it should be noted, that have no apparent connection with actual income, or with actual spending needs in retirement.

For public policy purposes, EBRI has long defined adequate retirement income as having the financial resources to cover basic expenses plus uninsured medical costs in retirement. Working from that definition as a starting point, along with an assumption that retirement represents the cessation of paid employment and begins at age 65[2], we have projected that approximately 44 percent of Baby Boomer and Gen-Xer households are simulated to be at risk of running short of money in retirement, assuming they retain any net housing equity until other financial resources are depleted.  Our most recent assessment of that total aggregate gap between needs and available resources is $4.6 trillion, with an individual average of approximately $48,000.[3]

That is, of course, still a large gap, though one considerably smaller than that highlighted in the article.  While it represents a lot of households—it also includes a wide range of personal circumstances, from individuals projected to run short by as little as a dollar to those projected to fall short by tens of thousands of dollars.[4]  For those seeking to understand, and perhaps craft solutions for, the current projected shortfalls, this is an important distinction, and one given short shrift by a headline’s focus on the aggregate.

A lot of science goes into making weather projections, and yet a temperature difference of a mere degree or two can be the difference between a modest rainfall or a blizzard of epic proportion.  Beyond those reality variables, imprecise modeling assumptions can distort forecasts, producing their own disruptions.

When it comes to effective retirement policy, it is, of course, important to be able to quantify just how big the nation’s retirement savings shortfall is.  It is, however, perhaps even more important to remember that whether an individual shortfall exists will be a combination of individual circumstances, as well as varying degrees of preparation, access, and needs.

Nevin E. Adams, JD

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[1] The NIRS report, “The Retirement Savings Crisis: Is it Worse than We Think?” is available online here.

[2] EBRI has also performed analysis on retirement ages other than 65. 

[3] EBRI recently submitted congressional testimony on “The Role of Social Security, Defined Benefits, and Private Retirement Accounts in the Face of the Retirement Crisis.”  Included in that testimony was an analysis of the probabilities of successful retirement by income quartile for both voluntary and automatic enrollment 401(k) plans.   You can read it online here.   

[4] Nearly one-half (49.1 percent) of Gen Xers are projected to have at least 20 percent more than is simulated to be needed, for example, while about 1 in 5 (19.4 percent) are projected to have less than 80 percent of what is needed. See “All or Nothing? An Expanded Perspective on Retirement Readiness,” online here. 

A Year-End "Review"

This is the time of year when many people both look back at the year just past—and ahead to the next with a fresh perspective. It’s also that time of year when many make lists.

So, whether you’re looking to make some New Year’s resolutions, or just looking to improve your overall financial situation, here are 10 things to check off your 2013 list—and that can get your 2014 list off to a strong start.

1. Deal with debt (see Savings Resolutions for the New Year).
2. Establish a savings goal for retirement (see Estimate “Ed”).
3. Save for retirement—at work, or on your own (see Saving for Retirement Outside of Work).
4. Save early so that your savings can work for you (see The “Magic” of Compounding).
   
5. If you do have a retirement plan at work, make the most of it (see Making the Most of your Retirement Plan).
6. Maximize your savings—see if you’re eligible for the Savers’ Credit (see Credit Where Credit is Due).
7. See if a Roth 401(k) makes sense for your situation (see To Roth or Not?).
8. Know how much you’re paying for your retirement savings (see Shedding Some Light on your Workplace Retirement Plan Fees).
9. Keep an eye on your retirement savings investments (see Are Your Savings Investments Over-weighted?).
10. Don’t forget that you may have other important savings goals as well (see College “Education”–Saving For College).

Of course, a good place to start—any time—is to Choose to Save.^® You can find a wide variety of tools and resources—including the popular and widely recommended BallparkE$timate—at www.choosetosave.org[1]


Nevin E. Adams, JD

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If you are interested in, or working on, issues of financial literacy or savings education, you’ll want to check out $avings Account$, a free monthly update from the American Savings Education Council (ASEC) on the latest research and updates on new (and old but relevant) tools, as well as keep you up-to-date on various events, conferences, and symposiums relevant to ASEC’s Mission: To make saving and retirement planning a priority for all Americans.  You can sign up online here.

[1] Organizations interested in building/reinforcing a workplace savings campaign can also find a variety of free resources there, courtesy of ASEC.  Choose to Save® is sponsored by the nonprofit, nonpartisan Employee Benefit Research Institute Education and Research Fund (EBRI-ERF) and one of its programs, the American Savings Education Council (ASEC). The website and materials development have been underwritten through generous grants and additional support from EBRI Members and ASEC Partner institutions.

Believe Able

In that holiday classic “Miracle on 34th Street,” a man named Kris Kringle (who claims to be “the one and only” Santa Claus) winds up having his sanity challenged in court. Ultimately, the judge dismisses charges that would have resulted in Kringle’s institutionalization—not because he actually is persuaded to believe by the evidence that Kris is the REAL Santa Claus, but because he finds it convenient to demur to the determinations of a higher authority (in this case, the US Postal Service).

While belief may not always be a portent of reality, it can be a powerful force, as any parent who has ever nurtured Santa’s existence well knows.

The 2013 EBRI/Greenwald & Associates Health and Voluntary Workplace Benefits Survey¹ (WBS) reveals that most workers believe their employers or unions will continue to provide health care insurance— although there have been employer surveys indicating that, at some point in the future, some may not. Not that workers fail to appreciate future uncertainties: While 46 percent of worker respondents to the WBS indicate they are extremely or very confident about their ability to get the treatments they need today, only 28 percent are confident about their ability to get needed treatments during the next 10 years.

Similarly, when it comes to retirement, the Retirement Confidence Survey² has, for nearly a quarter century now, shown a remarkable resilience in worker confidence regarding their financial future in retirement, belying the aggregate savings levels indicated in that same survey. Over the course of that survey, we’ve seen confidence wax stronger and then wane―and while we’ve seen distressingly low levels of preparation, more recently we’ve also seen a growing awareness of the need for those preparations. The RCS has also documented a consistent trend in workers believing they will be able to work, and to work for pay, longer than the experience of retiree respondents suggests will be a viable option.

Next month we’ll field the 24th annual version of that Retirement Confidence Survey, where we will (among other things) seek to gain a sense of American workers’ preparation for (and confidence about) retirement, as well as some idea as to how those already retired view the adequacy of their own preparations. Is a lack of worker confidence about retirement finances a troubling indicator? Or does it suggest that they have a greater appreciation for the need to prepare?

Later in the year the WBS will, as it has since 1998, probe sentiments about health care and voluntary benefits: Will workers sense a continued commitment by their employers and unions to provide health care coverage? If not, how might that affect their commitment to their work and their workplace? How might concerns about health coverage affect and influence retirement preparations?

In the cinematic “Miracle,” there seems to be a connection between believing something will happen and its reality. Little Susan Walker goes so far as to intone “I believe… I believe… It’s silly, but I believe!” even as she stumbles upon the home of her dreams.

In the real world, the linkage between belief and reality isn’t generally so convenient. And employers, providers, and policy makers alike, know that being able to anticipate those potential gaps between belief and a future reality can be critical.

- Nevin E. Adams, JD

In addition to providing financial support to two of the industry’s most highly regarded employee benefit surveys, underwriters of the RCS and WBS have access to special early briefings on the findings, in addition to a number of other benefits. If you’d like to know more, email Nevin Adams at nadams@ebri.org

You can find additional information about the RCS online here and information about the WBS (previously called the Health Confidence Survey) online here.

¹ See “2013 Health and Voluntary Workplace Benefits Survey: Nearly 90% of Workers Satisfied With Their Own Health Plan, But 55% Give Low Ratings to Health Care System,” online here.

² See “The 2013 Retirement Confidence Survey: Perceived Savings Needs Outpace Reality for Many,” online here.

"Keep" Sakes

Ask any benefits manager why their organization offers benefits to their workers, and my experience suggests that the reliably consistent answer is “to attract and retain the best workers.”

Indeed, as the 2013 Health and Voluntary Workplace Benefits Survey (WBS)¹ bears out, the benefits package that an employer offers prospective employees is an important factor in their decision to accept or reject a job. In fact, a full third of employees say the benefits package is extremely important, and another 45 percent say it is very important. Moreover, a quarter of employees report they have accepted, quit, or changed jobs because of the benefits—other than salary or wage level—that an employer offered or failed to offer.²

However, the WBS also found that many workers are not especially satisfied with the benefits package offered by their employer: 31 percent are only somewhat satisfied, and one-quarter are not too satisfied (12 percent) or not at all satisfied (14 percent).

It is, of course, entirely possible that these workers are genuinely dissatisfied with the options provided by their employer. On the other hand, the WBS found that a substantial minority of employees may be confused about the benefits their employer offers and who pays for them—a level of ignorance that belies the time and expense often undertaken by employers in making those offerings available.

Employers increasingly look not only to attracting and retaining a qualified workforce, but (at an appropriate time and place), to helping an aging workforce migrate into retirement—a process that can be assisted by a well-crafted benefit program. And it’s not surprising that workers see value in offering additional voluntary benefits to those nearing retirement age.

In fact, the WBS finds that large majorities of workers say they think the following products and services would be extremely or very valuable to workers nearing retirement age:

• An annuity product that makes guaranteed monthly lifetime payments (83 percent).
• Life insurance that pays benefits to the surviving spouse, helping to replace income from Social Security or other sources that is discontinued when a worker dies (77 percent).
• Retirement planning that includes assistance with deciding when to retire, when to claim Social Security benefits, what Medicare option to choose, and how to set up a stream of income for retirement (76 percent).
• Long-term care insurance (71 percent).

During my working life, there have been times when I didn’t care much about certain aspects of the benefits package. As a young, single individual, I focused primarily on salary and vacation—cared less about health care insurance than I should have, while retirement benefits, even for someone who worked with them every day, were distant prospects. As my family grew, my priorities (and those that I assigned to various benefits) shifted. It was still presented as a package, of course, but the various components mattered more or less depending on my personal situation.

Ultimately, employers looking to keep the best workers committed and engaged know that benefits, like workers, have a life cycle, and that programs designed to keep the best workers are not only well-designed for those various life stages, but (as the WBS reinforces) are well-communicated and reinforced throughout a worker’s career.

Nevin E. Adams, JD

¹ The 2013 Health and Voluntary Workplace Benefits Survey (WBS) was conducted by EBRI and Greenwald & Associates. Additional information can be found online here.  If you’d like to become an underwriter of this important survey, please contact Nevin Adams at nadams@ebri.org, or Paul Fronstin at fronstin@ebri.org

² “Views on the Value of Voluntary Workplace Benefits: Findings from the 2013 Health and Voluntary Workplace Benefits Survey,”, can be found in the November 2013 EBRI Notes article online here.

"Half" Measures

People are often grouped into one of two camps: the optimists, who generally see the glass as half-full, and the pessimists, and who are said to view the glass as half-empty.

One of the most commonly cited data points about retirement is that “only about half of working Americans are covered by a workplace retirement plan.” Drawn from the U.S. Census Bureau’s Current Population Survey (CPS), it’s cited by both those who see the current system as inadequate (or worse), as well as its most ardent champions—in other words, both by those who see the glass as half-full, and those who are inclined to see it as half-empty.

This is a data point that we’ve written about before, and one that was acknowledged in a recent EBRI Issue Brief[1] that explored various demographic and economic factors that affect retirement plan participation. The data point is relatively simple math: the number of workers who say they participated in a workplace retirement plan divided by the total number of workers. But when you take a closer look at the numbers, it’s not really that straightforward—especially since there are various types of workers, and that makes a huge difference in retirement coverage.

Consider that, according to that CPS data, in 2012, a total of 80.5 million workers worked for an employer/union that did not sponsor a retirement plan. However, the EBRI analysis reveals that of the wage and salary workers in this group:

• 8.9 million were self-employed—and thus ostensibly could have started a plan on their own without the action of an employer.
• 6.4 million were under age 21—below ERISA’s minimum-age coverage limit.
• 4.3 million were age 65 or older—beyond what many (and most retirement plans) still consider ”normal” retirement age.
• 32.6 million were not full-time, full-year workers—also not required to be covered by a workplace retirement plan under ERISA.
• 17.0 million had annual earnings of less than $10,000.

Now, many of these workers fell into several of these categories simultaneously, such as being under age 21, having less than $10,000 in annual earnings, and not being full-time, full-year workers. So, as the EBRI analysis explains, once you apply certain commonsense filters for age, annual earnings, work status, and/or employer size, you can get a more realistic perspective.

If you consider the population of wage and salary workers ages 21–64 who work full-year, make $5,000 or more in annual earnings, and work for employers with 10 or more employees, 32.5 million—or 36.4 percent of this population—worked for an employer that did not sponsor a retirement plan in 2012.

Said another way, nearly two-thirds of workers with those characteristics worked for an employer that DID sponsor a retirement plan in 2012. Either way, the population of workers who don’t have access to a workplace retirement plan who might reasonably be expected to participate is considerably different than the simplistic assessment offered by the commonly cited “less than half” data point.

Different people can look at the same data and draw different conclusions: some are inclined to see the glass as “half full,” others look at the same results and say it’s “half empty.”

But none of that matters if you’re looking at the wrong size glass.

Nevin E. Adams, JD

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[1] The November EBRI Issue Brief, “Employment-Based Retirement Plan Participation: Geographic Differences and Trends, 2012” is available online here.

Hind "Sleights?"

In recent days, we have commemorated both the 50th anniversary of the assassination of President Kennedy, and the 150th anniversary of the Gettysburg Address. Occasions such as these are natural opportunities for us to look back and reflect on the past—to consider what has happened since—and to consider what might have been.

As imperfect as our perception of current events can be, so-called 20/20 hindsight isn’t always what it’s cracked up to be, either. Even for those who were “there,” memories can be shaped or influenced by the passage of time, the perspectives of others, media coverage, and the like.

In the world of employee benefits, if you’ve ever said (or intimated) that traditional pension plans in the private sector were once widespread,¹ that health care insurance exchanges are a new concept,² or that 401(k)s were a legislative “accident” discovered (and promoted) by a single “father”—well then, you’re likely contributing to the confusion about the realities of the past that can obscure an appreciation of the present, and a clearer vision for the future.

Next month we’ll be commemorating EBRI’s 35th anniversary,³ and on Dec. 12 we’ll also be conducting our 73rd policy forum. A series of expert panels will be considering the state of employee benefits—as it was, as it is, and as it is likely to be. We’ll have the perspectives of those who have been directly involved in the development and execution of policies at the dawn of ERISA, who have both negotiated and navigated the subsequent regulatory, operational, and legislative shifts, and futurists who are helping anticipate (and perhaps shape) the next generation of employee benefit plan designs.

Hindsight—insights—foresight. It’s a unique combination. You’ll want to be “there.”

Join us.

The agenda for EBRI’s 73rd policy forum (and registration details) are online here. You can view the recorded webcast HERE. 

Nevin E. Adams, JD

¹ See “The Good Old Days,” online here.

² See “Private Health Insurance Exchanges and Defined Contribution Health Plans: Is It Déjà Vu All Over Again?” online here.

³ For additional insights, see the Fall 2013 EBRI President’s Report from Dallas Salisbury, online here.

Take It or Leave It?

While each situation is different, in my experience leaving a job brings with it nearly as much paperwork as joining a new employer. Granted, you’re not asked to wade through a kit of enrollment materials, and the number of options are generally fewer, but you do have to make certain benefits-related decisions, including the determination of what to do with your retirement plan distribution(s).

Unfortunately, even in the most amicable of partings, workers have traditionally lacked the particulars to facilitate a rollover to either an individual retirement account (IRA) or a subsequent employer’s retirement plan—and thus, the easiest thing to do was simply to request that distribution be paid to him or her in cash.

Over the years, a number of changes have been made to discourage the “leakage” of retirement savings at job change: Legal thresholds for mandatory distributions have been set; a requirement established that distributions between $1,000 and $5,000 on which instructions are not received either be rolled over into an IRA or left in the plan; and even the requirement that a 20 percent tax withholding would be applied to an eligible rollover distribution—unless the recipient elected to have the distribution paid in a direct rollover to an eligible retirement plan, including an IRA. All these have doubtless served to at least give pause to that individual distribution “calculus” at job change.

Indeed, a recent EBRI analysis¹ indicates that workers now taking a retirement plan distribution are doing a better job at holding on to those retirement savings than had those in the past. Among those who reported in 2012 ever having received a distribution, 48.1 percent reported rolling over at least some of their most recent distribution into another tax-qualified savings vehicle, and among those who received their most recent distribution through 2012, the percentage who used any portion of it for consumption was also lower, at 15.7 percent (compared with 25.2 percent of those whose most recent distribution was received through 2003, and 38.3 percent through 1993).

As you might expect with the struggling economy, there was an uptick in the percentage of recipients through 2012 who used their lump sum for debts, business, and home expenses, and a decrease in the percentage saving in nontax-qualified vehicles relative to distributions through 2006. However, the EBRI analysis found that the percentage of lump-sum recipients who used the entire amount of their most recent distribution for tax-qualified savings has increased sharply since 1993: Well over 4 in 10 (45.2 percent) of those who received their most recent distribution through 2012 did so, compared with 19.3 percent of those who received their most recent distribution through 1993.

The EBRI report also notes that an important factor in the change in the relative percentages between the 1993 and 2012 data is the percentage of lump sums that were used for a single purpose. Consider that among those who received their most recent distribution through 2012, nearly all (94.0 percent) of those who rolled over at least some² of their most recent distribution did so for the entire amount.

There is both encouraging and disappointing news in the EBRI report findings: The data show that improvement has been made in the percentage of employment-based retirement plan participants rolling over all of their LSDs on job change, along with less frequent pure-consumption use of any of the distributions. However, the data also show that approximately 55 percent of those who took a lump-sum payment did not roll all of it into tax-qualified savings.

In common parlance, “Take it or leave it” is an ultimatum—an “either/or” proposition that frequently comes at the end, not the beginning, of a decision process. However, as the EBRI analysis indicates, for retirement plan participants it is a decision that can (certainly for younger workers, or those with significant balances) have a dramatic impact on their financial futures.

Nevin E. Adams, JD

 

¹ The November 2013 EBRI Notes article, “Lump-Sum Distributions at Job Change, Distributions Through 2012,” is online here. 

 

² Two important factors in whether a lump-sum distribution is used exclusively for tax-qualified savings appear to be the age of the recipient and the size of the distribution. The likelihood of the distribution being rolled over entirely to tax-qualified savings increased with the age of the recipient at the time of receipt until age 64. Similarly, the larger the distribution, the more likely it was kept entirely in tax-qualified savings.

Use It or “Lose” It

At the time that EBRI was founded 35 years ago, I was about six months into a job doing pension accountings for a large Midwestern bank. At the time, I didn’t realize I’d still be working with those kinds of issues in 2013—in fairness, like most recent college graduates, I wasn’t really thinking about anything that was 35 years in the future. I had a job, a car that ran, and a reasonably nice stereo in an apartment in the Chicago suburbs that didn’t have much else.

My employer had a nice defined benefit (DB) pension, and an extraordinarily generous thrift-savings plan, but those weren’t big considerations at the time. I had to wait a year to participate in the latter (pretty much standard at the time), and as for the former—well, you know how exciting pension accruals are to 22-year-olds (even those who get paid to do pension accountings). Turns out, I worked there for nearly a decade, and walked away with a pretty nice nest egg in that thrift savings plan (that by then had become a 401(k)), and a pension accrual of…$0.00.

At the time, I didn’t think much about that.  Like many private-sector workers, I hadn’t contributed anything to that pension, and thus getting “nothing” in return didn’t feel like a loss.

By the time I left my second employer (this time after 13 years), the mandated vesting schedules had been shortened by legislation—but even then, the benefit I hope to collect one day won’t amount to much on an annual basis, and won’t be anything like the benefit that plan might have provided if only I had remained employed there – for the past 20 years. Instead, like my service with that prior employer, that DB benefit is frozen in time. That result stands in sharp contrast with the 401(k) balances I have accumulated and that continue to grow, despite having changed employers twice since then.

Of course, national tenure data suggest that my job experience was something of an anomaly.  When you consider that median job tenure in the United States  has hovered in the five-to-seven-year range going back to the early 1950s[i], there have doubtless been many private-sector workers who were, for a time, like me, participants in a traditional defined benefit pension plan, only to see little or nothing come of that participation[ii].

I often hear people say that 401(k)s were “never designed to replace pensions,” a reference to the notion that the benefit defined by most traditional pension plans stood to replace a significant amount of pre-retirement income at retirement.  Now, there’s no question that the voluntary nature of the 401(k) programs, as well as their traditional reliance on the investment direction and maintenance by participants, can undermine the relative contribution of the employer-sponsored plan “leg” to a goal of retirement income adequacy.

However, what often gets overlooked in the comparison with 401(k)s is that when you consider the realities of how most Americans work, traditional defined benefit realities frequently fell short of that standard as well. Indeed, in many cases, based on the kinds of job changes that occur all the time, and have for a generation and more, they could provide far less[iii].

In both cases, it’s not the design that’s at fault—it’s how they are used, both by those who sponsor these programs, as well as those who are covered by them.

Nevin E. Adams, JD 

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[i] See “Employee Tenure Trends, 1983–2012” available here.  

[ii] And a great number of private-sector workers never participated in a defined benefit plan.  See “Pension Plan Participation” available here.  

[iii] A recent EBRI Issue Brief provides a direct comparison of the likely benefits under specific types of defined contribution (DC) and DB retirement plans. See “Reality Checks: A Comparative Analysis of Future Benefits from Private-Sector, Voluntary-Enrollment 401(k) Plans vs. Stylized, Final-Average-Pay Defined Benefit and Cash Balance Plans”.

Connecting the Dots

One of my favorite works of art is “A Sunday Afternoon on the Island of La Grande Jatte,” by Georges-Pierre Seurat. I was introduced to this painting in college via an art appreciation class at the Art Institute in Chicago (it even makes a brief appearance in the film “Ferris Bueller’s Day Off”).

The subject matter isn’t really extraordinary―just a group of individuals scattered about a park taking in the scenery. But what amazed me the first time I got close to the painting―and does to this day―is that Seurat created these images, and the marvelous color shadings in these images, through the use of thousands (perhaps millions: the painting itself measures 7 by 10 ft.) of individual dots.

Individual retirement accounts (IRAs) are a vital component of U.S. retirement savings, representing more than 25 percent of all retirement assets in the nation, with a substantial portion of these IRA assets originating in employment-based retirement plans, including defined benefit (pension) and 401(k) plans. Little wonder that those accounts have been a focus of the pending fiduciary regulation re-proposal.

Despite IRAs’ importance in the U.S. retirement system, there is a limited amount of knowledge about the behavior of individuals who own IRAs, alone or in combination with employment-based defined contribution (DC) plans.

Consequently, the Employee Benefit Research Institute (EBRI) created the EBRI IRA Database, which for 2011 contained information on 20.5 million accounts with total assets of $1.456 trillion. When looking across the entire EBRI IRA Database, as of year-end 2011, 44.4 percent of the assets were in equities, 10.7 percent in balanced funds, 18.0 percent in bonds, 13.0 percent in money, and 13.8 percent in other assets―an allocation spread roughly comparable to that found for 401(ks) in the EBRI/ICI 401(k) database at a comparable point in time.

But when you look inside the IRA database, certain interesting aspects emerge. For example, the asset allocation differences between genders were minimal: bond, equity, and money allocations were virtually identical. Moreover, in looking across IRA types, the average equity allocation at each age group was higher for owners of Roth IRAs than for owners of other IRA types―this is perhaps not surprising when you consider that a separate EBRI analysis also revealed that individuals contributing to Roth IRAs tended to be younger. Additionally, as the most recent report reveals, balanced funds have by far the largest asset allocations among young (under age 45) Roth IRA owners.

One might not be surprised to discover that both genders’ average allocations to bonds increased with age (starting at age 25), although the average amount allocated to balanced funds decreased as the age of both genders increased after age 25―with the exception of men ages 75–84. And while equity allocations for genders peaked and then plateaued for those ages 45−54, it then proceeded to INCREASE for male owners age 85 or older.

Of course, an IRA could be only part of an individual’s portfolio of retirement assets: That’s why the goal of the integration of the EBRI databases is to be able to look at the two largest sources of retirement assets (IRAs and DC plans) to examine owner behavior across (as well as within) the accounts to provide a better understanding of the decisions Americans make with their retirement savings.

Because sometimes you need to see the big picture―and sometimes the better understanding of the big picture comes from connecting the dots.

- Nevin E. Adams, JD

The October EBRI Notes article, “IRA Asset Allocation, 2011” is online here. 

Also see “The Generation in Roth IRA Contributions,” online here. 

Reserve Cause

When I was still a child, my parents owned a 1958 VW Beetle. I was pretty young, so I don’t remember much about that car, other than the color, and what struck me, even as a child, as the “odd” reversal of the trunk and engine. One thing I do remember is that it didn’t have a gas gauge. Instead, there was a reserve tank switch, and when the engine started sputtering, you opened the valve, and got enough “extra” gas to get to a gas station.

The trick was that you had to remember to leave that reserve open when you filled up―if you didn’t, well then, you had no reserve. As you might expect, the reason I remember that relatively obscure feature to this day is a trip that was “interrupted” when my family discovered the hard way that my father had forgotten to reset the reserve switch.

Retirement planning typically focuses on looking to ensure that your post-retirement income sources are adequate to replicate some percentage of your preretirement income level. Underlying that approach is the assumption that individuals incur roughly the same kinds of expenses in retirement, although the amount, and proportionate share, of those expenses can certainly shift, particularly in areas such as health care. Indeed, while EBRI’s Retirement Security Projection Model^®  (RSPM) and Retirement Readiness Rating have long incorporated the uninsured costs of post-retirement health care and long-term care, a few other  retirement projection models only recently acknowledge post-retirement health care costs as a discrete retirement savings need.

As a recent EBRI Notes article[1] explains, individuals should be concerned about saving for health insurance premiums and out-of-pocket expenses in retirement for a number of reasons. Medicare generally covers only about 60 percent of the cost of health care services for Medicare beneficiaries ages 65 and older, while out-of-pocket spending accounts for 12 percent.[2] The percentage of private-sector establishments offering retiree health benefits has been falling, and where benefits are offered, they are becoming less generous, even in the public sector.

While EBRI’s analysis indicates that savings targets for post-retirement health expenses (other than nursing home and home health care costs) declined between 6 percent and 11 percent between 2012 and 2013 for a person or couple age 65, there are a wide variety of possible outcomes, depending not only on the age at which an individual retires, but also the length of life after retirement, the availability and source of health insurance coverage after retirement to supplement Medicare, their health status and out-of-pocket expenses, the rate at which health care costs increase, the impact of interest rates and other rates of return on investments, as well as possible changes in public policy―not to mention the targeted probability of success of those targets.

Remember that while it is possible to come up with a single number that individuals can use to set retirement savings goals, a single number based on averages will be wrong for the vast majority of the population.

But, as with that old VW Beetle, those who set savings targets that fail to set aside any reserve for the eventuality might well wind up short of their destination.

Nevin E. Adams, JD

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[1] The EBRI Notes article, “Amount of Savings Needed for Health Expenses for People Eligible for Medicare: More Rare Good News” is online here.
 

[2] Note that many individuals will need more than the amounts cited in this report because this particular analysis does not factor in the savings needed to cover long-term care expenses, nor does it take into account the fact that many individuals retire prior to becoming eligible for Medicare. However, some workers will need to save less than what is reported if they choose to work during retirement, thereby postponing enrollment in Medicare Parts B and D if they receive health benefits as active workers.